Year 2004

Q. No. 1 Mr. Ramlal the general manager of Y ltd. Retired on December 31,2003
after 30 years of service. The particulars of his income are as follows:
(a) Salary Rs. 8,000 per month from January 1, 2003. House rent allowance
Rs. 3,000 per month from January 1, 2003.
(b) Medical expenses reimbursed by the employer Rs. 21,000 for the period
from April 1, 2003 which includes Rs. 5,000 paid to a Government hospital.
(c) The employer provides him a car of less than 1.6 litres capacity and driver
for official and personal use.
(d) Ramlal contributes 22% ( 12% regular and 10% additional voluntary
contribution) to a recognized provident fund and the company matches his
regular contribution of 12%
(e) He lives in a rented house in Delhi and pays Rs. 4,000 per month as rent.
(f) Ramlal received Rs. 1,50,000 as gratuity. He is not covered by the payment
of Gratuity Act.1972.
(g) He received Rs. 1,60,000 for encashment of leave, being 10 months leave not
availed of.
(h) In addition to the above he is provided with the other benefits and facilities
such as
(i) Free gas and water for his domestic use Rs. 4,000
(ii) A domestic servant ( Salary paid by the employer ) 3,500
(iii) Free lunch outside office Rs.5,000.
(iv) Education allowance of Rs. 6,000.
Compute Mr. Ramlal’s Income for the assessment year 2004-2005.

Solution: (Kindly beware of the dates in such questions. Given data pertains to
Calendar Year, where as IT Act mandates accounting on only Financial Year basis ie
01 Apr to 31 Mar. Therefore all income/expenditure from 01 Jan to 31 Mar 2003 have to be
disregarded in calculation).
Assessment Year - 2004-05
Name - Mr Ramlal
Computation of Income
Salary (Apr 03-Dec 03) = Rs 8000 x 9 months 72000
House Rent Allowance = Rs 3000 x 9 months 27000
Less: Exempted Amount (Refer Note 1 for calculations) 27000 NIL
Medical Expenses Reimbursement 21000
Less: Exempt amount as per IT Act 15000 6000

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Car Perquisites = 1200 PM x 9 months 10800
Add: Driver’s salary valuation 600 x 9 months 5400 16200
Gratuity (Refer Note 3 for calculation) 30000
Leave Salary (Refer Note 4 for calculation) 80000
Other Perquisites
(a) Free Gas and Water 4000
(b) Domestic Servant 3500
(c) Lunch Outside office premises 5000
(d) Education Allowance 6000
Less: Exempt = 2 (100 x 9) for 2 children 1800 4200
Income From Salary 220900

NOTES:

Note 1: House Rent Allowance Calculation

(a) 50% of Salary = ½ x 8000 = 4000
(b) Actual HRA received 3000
(c) Rent Paid minus 10% of Salary = 4000 – 800= 3200
Least of the above three amounts eligible for tax exemption. So, Rs 3000 PM is exempted.

Note 2: Recognised Provident Fund

Employer Contribution = 12% of Salary. This is the maximum Tax Free employer’s
contribution permitted by the Act. So, it is fully exempted.

Note 3: Gratuity
(a) Admissible gratuity by law
= ½ month salary x years of service = 4000 x 30= 120000
(b) Specified Amount by Central Govt 350000
(c) Actual Gratuity received 150000
Least of the above 3 amounts is the tax exempted gratuity amount = 120000
Balance amount = 150000 -120000 = 30000 is taxable

Note 4: Leave Encashment

(a) Entitlement as per law = Max 30 days accumulation per year of service
= 8000 x 30 years 240000
(b) 10 months salary at average rate = 8000 x 10 = 80000
(c) Max Amount specified by Central Govt = 300000
(d) Actual amount received by Ram Lal 160000
Least of the above four amounts is tax exempted amount = 80000
Balance amount = 160000 – 80000 = 80000 is taxable.

Q. No.2. Following is the Profit and Loss account of SS. Ltd. For the year ended
31-03-2004.

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Particulars Rs. Particulars Rs.
To Opening Stock By Sales 1,80,00,000
Finished goods 5,00,000 By Commission 30,00,000
Work-in-progress 1,00,000 By Excess provision no
6,00,000 Longer needed:
To Raw material consumed 44,00,000 For income tax 5,00,000
To Salaries, Wages and bonus 16,00,000 For expenses 2,00,000
To Power and fuel 4,00,000 By Closing Stock:
To Stores 10,00,000 Finished goods 7,00,000
To Administrative expenses 5,00,000 Work-in-progress 1,00,000
To sales expenses 10,00,000
To Depreciation 15,00,000
To Interest to:
Supplier for late payment 1,00,000
Unsecured lenders 4,00,000
Bank 2,00,000
Debentures 3,00,000
Financial Institutions 5,00,000
To Provision for income tax 25,00,000
To Transfer to:
General reserve 30,00,000
Debenture redemption 15,00,000
To Interim dividend 10,00,000
To Proposed dividend 15,00,000
To Balance C/fd 5,00,000 _________
2,25,00,00 2,25,00,000
0

You are informed that –

(a) Sales expenses included Rs. 50,000 being entertainment expenses.
(b) Money borrowed through debentures was used for new plant and
machinery costing Rs. 30,00,000.
(c) Depreciation allowable as per Income Tax rule is Rs. 25,00,000
(d) Administrative expenses include Rs. 20,000 paid for carrying on scientific
research
(e) Out of interest debited to Profit and Loss account the following is unpaid:
(i) To suppliers for late payment Rs. 10,000
(ii) To financial institutes Rs. 50,000
The above amounts were unpaid till 31 October 2004, the due date for filing
the return of income for SS ltd.
Shri Jash, The Managing Director asks you to compute profits and gains of business
for the assessment year 2004-2005. (20)

Page 3 of 18 - Taxation – Solved Q Papers

Solution: Assessment Year – 2004-05
Income from Business/Profession

Net Profit as per Profit and Loss Statement (Balance C/F) 500000
Add: Inadmissible Items
Depreciation charged off 1500000
Interest unpaid to FI (U/s 43 B)(Note 3) 50000
Provision for Income Tax 2500000
Transfer to Reserves (3000000 + 1500000) 4500000
Interim Dividend 1000000
Proposed Dividend 1500000 11050000
11550000
Less: Admissible Expenses
Depreciation as allowed by IT Rules 2500000
Weighted Deduction for Scientific Research 5000
Excess Provision (500000 + 200000) 700000 3205000
Total Taxable Income 8345000

NOTES
Note 1: Weighted deduction towards scientific research = 125%
= 20000 x 125% = 25000
Balance amount admissible = 25000 – 20000 = 5000

Note 2: Entertainment expenditure are considered as Business Expenses and therefore fully
exempt from tax.

Note 3: Owings to Financial Institutions/Duty payment to Govt, etc are not allowed on
accrual basis. These are admissible only on payment basis.

Note 4: Interest on debentures is considered as revenue expense since date of expense vis a
vis date of production is not given in the question paper. Thus capitalization of
expense for pre-production period is not possible.

Note 5: Dividend is not allowed as business expenses. Transfer to reserves is also not
allowed as an expenses. Any provisions are also not allowed. Income Tax payment
is specifically disallowed as business expense.

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Q. No.3. Write Short notes on (any three) (5 X 3 = 15)
(a) Exempt Income
(b) Expenditure on Scientific Research
(c) Deduction of Export profits
(d) Speculation losses
(e) Entertainment allowance

Ans:

(a) Exempt Income: Income Tax Act exempts certain incomes from levy of income
tax. Most of these incomes are listed under Chapter VI A. Following are some of
them:
(i) Agricultural Income: Entire agricultural Income is exempt from tax.
However, if the assessee has other incomes also, agricultural income is to be
accounted while calculating the tax liability. It means that in case of
agricultural income together with other incomes, other incomes will move
into the higher tax brackets.
(ii) Payment from HUF at the time of Partition of HUF: Since HUF
property is a shared property of all members, its division is only re-
distribution of assets among the existing owners and not an income in the
hands of the assessees. Thus, it is exempt from levy of income tax.
(iii) Share Profit of a Partnership Firm: Share of profit from a Partnership
Firm in the hands of a partner is nothing but income from business and
profession on which tax has already been paid. Further tax would amount to
double taxation. Thus it is exempt from tax.
(iv) House Rent Allowance: IT Act allows HRA as a tax free allowance with
certain restriction imposed on maximum amount payable tax free based on
city criteria, basic salary, etc.
(v) Leave Salary: Leave salary when paid as the terminal benefit is allowed as
tax free payment with some limitations imposed on the maximum Tax free
amount.
(vi) Provident Fund Contribution by Employer/Interest Accrued on PF
Deposits: These payments are allowed as tax free.

(b) Expenditure on Scientific Research: Act provides for weighted deduction

for investments made in scientific research.
Expenditure on In-House Research – 150%
Sponsorship to IIT or other Govt Laboratories – 125%.

(c) Deduction for Export Profits: From current assessment year, old section on
export profits has been deleted. However, following sections are still available for
claiming exemption of export income: -

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 Sec 10 A – If a company is in Free Trade Zone – Income is exempt from
tax for 10 years.
Sec 10 AA – Special provisions in respect of newly established Units in
Special Economic Zones. 100 % profit exempted for 5 years and
50 % profits exempted for next 5 years
Sec 10 B – Income from 100% Export Oriented Units is exempted from
tax for 10 years irrespective of location of factory.
Sec 10 BA – Special provisions in respect of export of certain articles or
things. 100% deduction allowed.
(d) Speculation Losses:
(i) Speculation Losses can be set off against profits from speculation businesses
only and no other businesses.
(ii) Speculation losses can be carried forward up to next 4 years for setting off
against gains from speculation business in future.

(e) Entertainment Allowance: Entertainment allowance is allowed only to Govt

Servants to meet the hospitality expenses on official visitors. It is a flat allowance with no
strings of actual expenditure incurred. It is allowed as least of the following:
(i) 20% of the basic salary
(ii) Rs 5000/-
(iii) Actual amount received as Entertainment allowance.
Note: This benefit is not allowed to private sector salaried persons.

Q. No. 4 (a) How will you determine the income from house property under the
Income Tax Act? (7)

Ans: Method to Compute Income from House Property.

Step 1: Compute Gross Annual Value of the House. Find out Expected Rent by
comparing Municipal Valuation, Fair Rent and Standard Rent. Higher of Municipal
Valuation and Fair Rent is to be taken provided it does not exceed the Standard Rent. Else
take Standard Rent.
Step 2: Compare the expected rent with actual rent received/receivable. Whichever is
higher, will be selected as Gross Annual Value.
Note: Rent received/ receivable does not include rent of the period for which the property
remains vacant and unrealized rent.

Chart to Compute Gross Annual Value

Municipal Value
V/s Higher of the two
Fair Rent V/s Lesser of the two
Standard Rent V/s Higher of the two
Actual Rent

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Step 3. Put various values in table below and find the Income from the House
Property.

1. Gross Annual Value

2. Less : Municipal Taxes

3. Net Annual Value

4. Less: Deductions U/S 24

(a) Standard Deduction @ 30% Net Annual Value

(b) Interest on Borrowed Capital

5. Income from House Property

Note: In case of Self Occupied Property-

(a) Gross annual value is NIL.
(b) No Standard Deduction is allowed.
(c) Deduction on account of Interest on Borrowed Capital is limited to Rs
150000 per year only.
(d) No other deductions like insurance cost, water and electricity charge,
collection charges are allowed.

Q. No. 4 (b) Discuss briefly the specific deductions allowed while computing income
from House property. (8)

Ans. In case of House Property only two deductions are allowed:

(a) Standard Deduction
(b) Interest on borrowed Capital
No other deductions on any account, whatsoever, like insurance cost, water and
electricity charge, collection charges, maintenance charges, etc, are allowed.

Standard Deduction: Standard Deduction @ 30% of Net Annual Value is allowed

in case of Let Out Property only. It is not allowed in case of Self Occupied property.

Interest on Borrowed Capital: Interest on capital borrowed only from Banks and
Financial Institutions (not from friends and relatives and private financiers) is
allowed as deduction on accrued basis (payment may or not have been made).
While there is no limit on amount of interest in case of Let Out Property, there is a

Page 7 of 18 - Taxation – Solved Q Papers

 limit of Rs 150000 in case of Self Occupied House Property financed post 01 Apr
1999.

Q. No.5. What are the different categories of persons according to their legal
status? Give an illustration of each. (15)

Ans: There are 7 categories of Persons defined in the IT Act. This definition is inclusive
and therefore further additions at the discretion of IT officer are possible.
(a) An Individual (defined as a natural person – living human being) – Say a
Govt Servant, a Businessman. A self employed person
(b) A Hindu Undivided Family (HUF) – If inherited property is not divided
among claimants and put in a separate pool with joint ownership of pool,
such an arrangement is called HUF. Senior most among the owners of joint
property is called “Karta”.
(c) A company – Tata, Reliance, Sahara
(d) A Firm – a partnership firm like Ram Lal Chhagan Lal Enterprises having
two or more partners in business.
(e) An association of person or a body of individuals, whether incorporated or
not. – Like Housing Societies.
(f) A local authority – Municipal Corporation of Mumbai
(g) Every artificial judicial person not falling within any of the preceding
categories. Like Thirumala Devsthanam Trust.

Q. No.6 (a) Briefly discuss any 5 incomes, which are exempt under section 10 of
Income Tax Act. (8)

Ans: Exempted incomes are listed under Chapter VI A. Some of these have been
discussed in Question 3 (a) above.

Q. No.6 (b) What do you mean by depreciation under Income Tax Act. Briefly explain
the calculation of depreciation for Income Tax Act. (7)

Ans. Capital Expenses are not allowed to be charged off as business expense in the year
of expenditure. Instead, capital investments are allowed to be charged off gradually as
business expenses in the form of Depreciation at laid down WDV rates.
Conditions for Claiming Depreciation U/S 32
(a) Asset must be owned by assessee
(b) It must be used for the purpose of business/profession

Page 8 of 18 - Taxation – Solved Q Papers

 (c) It should be used during the relevant previous year
(d) Depreciation is available on tangible as well as intangible assets.

Other Salient Points

(a) Registered ownership is not necessary.
(b) If an asset is used for less than 180 days (i.e. purchased after 02 Oct of the
previous year), only 50% depreciation is allowed.
Calculation of Depreciation: Depreciation is calculated on the basis on Block of Assets.
Different item have different rates of depreciation allowed by the IT Act. A group of assets
allowed same rate of depreciation is called Block of Assets. In case of Income Tax,
depreciation is calculated on WDV basis and not SLM basis.
Different Situations to Compute Depreciation
(a) When the Written Down Value of a Block is Reduced to Zero:
Depreciation is allowed on cumulative WDV of assets in a block. In case the
WDV of any block falls to Zero or negative due to say spectacular profits on
sale of any old asset, no depreciation would be admissible for that block of
asset even though other assets with individual WDV are still there. Stated in
other words no depreciation is admissible if net WDV of a particular block
of assets is reduced to Zero, though the block of assets does not cease to
exist.
(b) If the Block of Assets Ceases to Exist: If a block of assets ceases to exist
i.e. If all the assets of the block have been transferred and the block of assets
is empty on the last day of the previous year, no depreciation is admissible
in such case.

Q. No.7(a) Enumerate the provisions of “set-off and carry forward losses” as

contemplated under the Income Tax Act in respect of different types of business
activities. (10)

Ans. Many “Person” have more than one source under a head of income or even more
than one head of income. While some sources and heads may have positive income, there
could be some heads or sources where there could be loss as well. There are limitations
placed on intra-head and even intra-source adjustments of profits and loss. The process of
setting off of losses and their carry forward may be covered in the following steps: -
Step 1: Inter-source adjustment under the same head of income.
Step 2: Inter-head adjustment in the same Assessment Year. Step 2 is applied only if
a loss cannot be set off under Step 1.
Step 3: Carry forward of loss. Step 3 is applied only if a loss can not be set off
under steps 1 and 2.

Page 9 of 18 - Taxation – Solved Q Papers

Inter-Source Adjustment: If the net result for any Assessment Year in respect of any
source, under any head of income, is a loss, the assessee is entitled to have the amount of
such loss “SET OFF” against his income from any other source under the same head of
income for the same Assessment Year.
Exceptions:
(a) Loss from Speculation Business: Set off allowed from gain from
speculation businesses only.
(b) Long Term Capital Loss: Set off allowed from Long Term Capital Gain
only.
(c) Loss from Activity of Owning and Maintaining Race Horses: Set off
allowed from profits of same business only.
(d) Loss from Business: Can not be set off against income under the head
“Salaries”.
(d) Loss from Lotteries, Cross Word Puzzles, Etc.: No set off of loss is
allowed.
Other than above 4 cases, any other loss can be set off against any other income within the
same head of income.

Inter- Head Adjustment: When the net result of computation made for any Assessment
Year in respect of any head of income is a loss, such loss can be set off against the income
from other heads with the exception of heads noted above.

In case the loss can not be adjusted in the same year, “CARRY FORWARD OF
LOSSES” is allowed to be set off against profits of subsequent years.
(a) Loss from Let Out House Property – in 8 subsequent years against gains
from House property only
(b) Loss from Self Occupied Property – From any head
(c) Pre construction period interest – 5 years in equal instalments
(d) Loss from Business/Professions – 8 years against gains from business
profits
(e) Loss from Speculation business – 4 years against gains from same business
(f) Loss from Capital transfer – 8 years against Capital gains only

Q. No.7(b) Discuss the scope of the head “Income from other Sources” and explain
the deductions available under the head. (5)

Ans: “Income from Other Sources” is the last and residual head of income and covered
under Section 56. Any income which does not specifically fall under any of the other four
heads of income (Viz Salary, Income from House Property, Profits and Gains from

Page 10 of 18 - Taxation – Solved Q Papers

Business or Profession or Capital Gains) is to be computed and brought to charge under
Section 56 under the head “Income From Other Sources”. Although the list of such
incomes is very long, following 8 incomes are always charged under this head: -
(a) Dividend
(b) Winnings from lotteries, races gambling or betting etc.
(c) Interest on deposits/securities
(d) Any sum of money exceeding Rs 25000 is received without any considering
(Gift) by Individual or HUF after 31 Aug 04.
(e) Income from machinery plant or furniture let on hire
(f) Income from letting of plant, machinery, furniture etc along with the
building and letting of building is inseparable from plant/machinery etc.
(g) Sum received by employer from his employees as contribution towards any
Staff Welfare Scheme
(h) Any sum received under a Keyman insurance policy including the bonus if
not taxed as salary or business income.

Deductions from “Income from Other Sources” (Section 57):

Only following deductions are available: -

(a) Expenses for the purpose of realizing dividend/interest.
(b) Family pension:
(i) Rs.15000 or
(ii) 33.33% of such income,
whichever is lower
(c) From “Income from machinery, plant or furniture let on hire”: Repairs,
Insurance premium, and depreciation are deductible.

Q. No.8 (a) Explain Long Term Capital Gains. How do you calculate Long Term
Capital Gains? (8)

Ans: Long Term Capital Gains arise out of transfer of capital assets which have been
owned for 36 months or more. In case of share market instruments like shares, debentures,
Units of UTI, Mutual Funds, etc, qualifying holding duration is only 12 months. That is to
say: if a stock market instrument was held for 12 months or more prior to transfer, it is to
be computed under Long Term Capital Gains. Long Term Capital Assets are generally
taxed at lower rate. They also get the benefit of indexation which reduces the tax incidence
further.
Method to Compute Long Term Capital Gain

Page 11 of 18 - Taxation – Solved Q Papers

 Step Amount
1. Find out full value of sale/consideration xxxx
2. Deduct the following: -
(a) Expenditure incurred wholly and exclusively
in connection with such transfers xxxx
(b) Indexed Cost of acquisition xxxx
(c) Indexed Cost of Improvement xxxx xxxx
Gross Capital Gain XXX
3. From the resulting sum, deduct various exemptions provided
by Sections 54, 54B, 54EC, 54AD, 54F, 54G xxxx
4. The Balance amount is Long term Capital Gain XXX
Computation of Indexed Cost of Acquisition:
Fair market value as on 01 April 1981 or X Cost inflation index for the year in
Cost of acquisition whichever is more which the asset is transferred.
Cost inflation index for 1981-82

Q. No.8 (b) Briefly explain the deductions with respect to Long Term Capital Gains. (7)

Ans: Income Tax Act grants total or partial deduction of capital gains under sections 54,
54 B, 54D, 54 EC, 54 ED, 54 F, 54 G and 54H.
Section 54: Capital Gains Arising From the Transfer of Residential House
Property: If such capital gains are reinvested in another house property
within a period starting 1 year before the gains to 3 years after the gains.
Section 54 B: Capital Gains from transfer of Agricultural land purpose are
reinvested in another agricultural land.
Section 54 D: Capital gains due to compulsory acquisition of land and building of
Industrial Undertaking.
Section 54 EC: Capital Gains on investment in certain bonds if it is reinvested are
another specified asset.
Section 54 ED: Capital Gains from investment in certain listed securities/units.
Section 54 F: Capital gains on transfer of a long term capital asset other than a
House Property, and amount must be invested in house property. When
the gains arising out of transfer of assets other than House Property are re-
invested in House Property, such amount is exempted from Capital Gains
tax.
Section 54 G: Capital gains arising out of shifting of industrial undertaking from
urban area.
*********

Page 12 of 18 - Taxation – Solved Q Papers

 Year 2003

Q.1. Write Short Notes on any of the FOUR: (4X5=20)

(a) Dividend received by individuals
(b) Concept of income accrued or arising
(c) Depreciation allowable u/s 32
(d) Payment/s made in cash
(e) Concept of indexed cost of acquisition
(f) ‘Capital Asset’ and ‘Transfer’
(g) Annual value

Ans: (a) Dividend Received by Individuals: Dividend income after 01 Jun 1997,
with the exception of FY 2002-03, is not taxable in the hands of the
shareholder. The company will pay dividend distribution tax on such
dividends. It means that dividend is exempt from taxation in the hands of the
individual.
(b) Concept of Income Accrued or Arising: Concept of Accrual or “Arising of
Income” means right to receive the payment. Once the right to receive the
payment is established, like raising of invoice, or due date of payment in
case of time bound payments, income is considered as “Accrued”. It has no
relation to actual receipt of such income. This concept is important because
it forms the basis of charge for majority of income.
(c) Depreciation Allowable under Section 32: Refer to Q. No.6 (b).
(d) Payment/s Made in Cash: Income Tax Act stipulates that all payments in
excess of Rs 20000 should be paid by cheque to the extent feasible. There is
no limit on number of such small payments. However, in case of payment in
cash exceeding Rs 20000, 25% of such payment would be disallowed as
business expenses. Which means that, against a business expense of
Rs 1 lakh paid in cash, only Rs 75000 would be admissible as business
expense.
(e) Concept of Indexed Cost of Acquisition: The purchasing power of rupee
keeps falling due to inflation and consequently, the value of asset keeps
appreciating in rupee terms. Such appreciation in rupee term is not a gain or
profit for the assessee and therefore not taxable. To offset such inflation
caused appreciation, and find net gain over and above the inflation, the govt
provides an inflation index for each year. This index is used to find the
inflation adjusted current cost of capital asset. This practice of indexation
was started from FY 1981-82, Assessment Year 1982-83. Therefore, all
capital assets purchased prior to 01 Apr 1981 are to be indexed on the
market value basis on that date or original cost, at the discretion of the
assessee.
(f) ‘Capital Asset’ and ‘Transfer’: These are the terminologies used with
reference to “Income from Capital Gains”. All assets which are purchased

Page 13 of 18 - Taxation – Solved Q Papers

 by a company to assist in business and not as “stock in trade”, are termed as
capital assets. Therefore, a particular item say a Truck is capital asset for an
assessee in Transport businesses, but stock in trade for a company like Telco
or its dealer. However, such capital assets are also required to be disposed
off at various points of time. Such disposal transactions are technically
called “Transfer”. Since most capital assets enjoy benefit of liberal
depreciation rates, often the market or disposal value of the asset exceeds
the depreciated/residual/book value. Such gains when accrued are taxable
subject to certain exemptions and conditions.
(g) Annual Value: This terminology is used with reference to Income from
House Property. House property is assessed for its annual income generation
capacity by way of rent on the basis of Municipal valuation/Fair Rent/
Standard Rent. The rent so arrived at is called Expected Rent. Expected Rent
is then compared with the actual rent received. Rent so finalized is called
Gross Annual Value. Municipal taxes are deducted from Gross Annual Value
to arrive at Net Annual Value.

Q.2 Win Win Ltd provides you with the following details to compute its income
from business for the Assessment year 2003-04: (20)
(a) Net Profit for the financial year 2002-03 amounted to Rs.10,00,000/-
(b) Income Tax paid for the financial year 2002-03 amounted to
Rs.7,00,000/-
(c) Dividend Income received during the financial year 2002-03 amounted
to Rs.2,00,000/-
(d) Depreciation allowable u/s 32, though provided in the profit and loss
account amounted to Rs.4,50,000/- is Rs.3,00,000/- only.
(e) Amounts received not taxable under the Act not credited to P & L A/c
amounted to Rs.5,00,000/-
(f) Salary paid amounted to Rs.25,75,000/- was duly accounted before
arriving at the net profit of Rs.10,00,000/- for the financial year 2002-03.
(g) Discount paid amounted to Rs.2,00,000/- was duly accounted during the
financial year 2002-03 before arriving at the Net Profit mentioned
above.
(h) The disallowances u/s 43B amounted to Rs.4,50,000/- during the
financial year 2001-02 subsequently duly paid.

Ans: Assessment Year - 2003-04

Net Profit as per Profit and Loss Statement 1000000
Add: Inadmissible Items

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 Income Tax 700000
Depreciation (taken separately) 450000 1150000
2150000
Less: Dividend Income 200000
Depreciation Allowed by IT Act 300000
Expenses U/s 43 B 450000 950000
1200000
NOTES

Note 1: Dividend income is considered business income from other sources.

Note 2: No treatment is required for serials e, f and g since these have already been taken
care of and therefore information is superfluous and unnecessary.

Q.3. Discuss any three sections under the Act which provide for exemption or
deduction in respect of export earnings. (15)

Ans. Refer to answer at Question 3(c) of 2004 Question Paper.

Q.4. Explain briefly the exemptions available u/s 10 with reference to any 5 items.

Ans. Incomes exempt under Section 10: -

(a) Agricultural Income. Agricultural income has been exempt from Income tax by
an Act of Parliament.
(b) Leave Salary on termination /Retirement of job.
(c) Death cum retirement gratuity.
(d) Commuted Value of Pension.
(e) Leave travel concession/travel assistance on retirement
(f) Any sum received under a life insurance policy
(g) Workman Compensation on termination of job.
(h) Amount received as part of share on dissolution of HUF.
(i) Share of profits received by partners from a partnership firm. Since the profits
have already been taxed in the hand of the partnership firm and therefore taxing
it again would amount to double taxation.
(j) Any allowances or perquisites paid or allowed as such outside India by the
Government to a citizen of India for rendering service outside India;

Page 15 of 18 - Taxation – Solved Q Papers

Q.5. Mr A receives Salary of Rs.6,00,000/- during the financial year 2002-03. He
claims the Standard Deduction amounting to Rs.20,000/- and profession tax of
Rs.3,000/-
Mr A also receives income from other sources consisting of dividend income
and income from bank deposits amounting to Rs.50,000/- and Rs.5,000/- respectively.
He also informs of claim u/s 88 amounting to Rs.10,000/-
You are advised to compute the taxable income of Mr A. (15)

Ans. Accounting Year 2005-06

Income From Salary 600000

Less: Professional Tax (-) 3000
Income from Other Sources
Dividend 50000 6000
Less : Exemption 50000 NIL
Interest on bank deposits 5000
Gross Total Income 602000
Less: Deduction under chapter VI A
U/s 80L 5000
Taxable Income 597000

Note 1. No Standard Deduction is allowed since total income is over Rs 500000.

Note 2. Dividend is tax free in the hands of share holder.

Q.6. (a) Distinguish between ‘Taxable profit’ and ‘Commercial profit’ (5)

Ans. Distinction between taxable profits and commercial profits arise because different
set of rules followed by company law board as per which balance sheet is to be prepared
and Income Tax Act. Many business expenses which are disallowed by IT Act are allowed
to be charged off in balance sheet and vice versa. Take the case of expenditure on research
which is allowed on weighted deduction basis by Income Tax Act but not in Balance Sheet.
Thus, Taxable profit is one which is calculated by applying IT Act regulations and used for
levying Income Tax. Commercial profit is one which is calculated by the rules of Company
Law Board and reflected in the balance sheet for projection to the stake holders.

Q.6. (b) Any three specific disallowances under the head ‘Income from business
or profession’ (10)

Ans. Specific disallowances under the head ‘Income from Business or Profession’ are
given by Sections 40, 40A and 43B. These are: -
(a) Interest, Royalty, /fees for technical services payable to a non resident
(Sec 40(a)(i) if the amount is payable outside India or to a non resident or
foreign company within India if the tax is not deducted.
(b) Fringe Benefit tax [Sec 40(a)(ic)}

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 (c) Income Tax [Sec 40(a)(ii)] – Any sum paid as Income Tax is not deductible.
Similarly any interest penalty or fine levied by IT department for any delay
or other infringement is also not deductible.
(d) Wealth Tax
(e) Salary Payable outside India without tax deduction.
(f) Payments made to relatives if expenditure is considered to be xcessive or
unreasonable having regard to fair market value.

Q.7. (a) Explain the concept of capital and revenue expenditure. (5)

Ans. Capital Expenditure - Broadly speaking, expenditure on the acquisition of a fixed

asset or expenditure which extends the life or value of an existing fixed asset is called
Capital Expenditure or CAPEX. In other words, it is an expenditure that is recorded as an
asset because it is expected to benefit more than the current period or an expenditure
intended to benefit the future activities of a business, usually by adding to the assets of a
business, or by improving an existing asset.

An expenditure made for purchase of goods with useful lives of more than one year is
classified as CAPEX. Such expenditures are not deducted in the year they are paid, even if
they are paid in connection with a trade or business. In other words, they are capitalized
and generally may be depreciated or amortized.

Revenue Expenditure - The cost of resources consumed or used up in the process of

generating revenue are generally referred to as revenue expenses. In other words, it is an
expenditure that is expected to provide a benefit for only a specific accounting period.

Q.7. (b) Give five examples of expenditure incurred wholly and exclusively for
the purpose of business. (10)

Ans.
(i) Cost of Raw Material
(ii) Salary and perquisites paid to the employees
(iii) Commission paid to selling agents
(iv) Interest paid on finance raised from banks or other sources.
(v) Litigation expenses paid to protect trade or business
(vi) Royalty paid for using trade mark of another company
(vii) License fee for carrying on the trade.
(viii) Annual Listing Fee paid to Stock Exchanges
(ix) Stamp and registration charges for entering into any contract.
(x) Rent of the premises

Page 17 of 18 - Taxation – Solved Q Papers

Q.8. Write Short Note on any three: (3X5=15)
(a) Agricultural Income
(b) AOP and BOI
(c) Mediclaim
(d) Speculation losses
(e) Stock options

Ans.
(a) Agricultural Income: Entire agricultural Income is exempt from tax.
However same is to be accounted while calculating the tax liability. It means
that in case of agricultural income together with other incomes, other incomes
will move into the higher tax brackets.
(b) AOP and BOI: AOP and BOI are abbreviations for Association of Persons and
Body of Individuals. The difference between the two lies in the definition of
person in the Income Tax. In the Income Tax Act, a “Person” is defined as any
entity, living or just legal, which earns income. Where as any living human
being is defined as “Individual”. Thus, an Association of Persons (AOP) is a
heterogeneous group of any number of entities from the list of 7 “Persons” as
defined in the IT Act. A BOI will consist of only natural persons.
(c) Mediclaim: Medical premium payment (Mediclaim) is covered under section
80D and deducted from gross total income. The maximum amount of premium
paid to be considered for deduction is Rs 10,000. However in the case of senior
citizens, the maximum amount eligible for deduction is Rs 15,000.
(d) Speculation Losses:
(i) Speculation Losses can be set off against profits from speculation
businesses only and no other businesses.
(ii) Speculation losses can be carried forward up to next 4 years for
setting off against gains from speculation business in future.

(e) Stock Options (ESOP): "Employees Stock Option Scheme" under which
a company grants option to its employees to buy a specified number of shares at
a specified price during a specified period. In some cases it is also termed as
“Employee Stock Ownership Plan" whereby an employee of the company is
given option to acquire shares of the company at a pre-determined price after a
certain period, directly or indirectly through a trust. Benefits under an ESOP
are not taxable as a perquisite.

Page 18 of 18 - Taxation – Solved Q Papers